Institutional Selling Demonstrates Depth of $AAPL Ignorance

Some SEC documents filed on Thursday suggest that hedge fund selling contributed—perhaps greatly—to the precipitous decline of $AAPL throughout the December quarter, and by extension the early part of 2013. That's not too surprising, but what's more interesting to me is that it's a demonstration of an idea that's been kicking around in my head for a while.

That idea is this: Most people don't get Apple. At all.

That's the short version. The slightly longer version is that there was just as much ignorance about Apple, it's business model, and the value proposition of Apple's ecosystem when the stock was skyrocketing as there has been in this 30 percent downturn.

Let's look at Friday's hedge fund news, which was picked up by Fortune's Philip Elmer-Dewitt. Some 16 institutions and hedge funds sold off a million shares or more. The chart below shows that many of these institutions reduced their relative stake in Apple significantly.

Institution Chart

Chart by The Mac Observer

That adds up to a lot of selling pressure in the middle of Apple's most profitable quarter ever. Millions of shares were added to the market, and even though the buyers were there to pick up these shares, economics 101 says that more selling pressure equals a lower price.


Something happened after $AAPL hit an all-time closing high of $702.10 on September 19th. Investor sentiment took a 180 degree turn, and from my viewpoint, there was a lot of FUD driving some of that sentiment.

PullquoteThere were reports of component orders and fears about declining demand for Apple's products had little or nothing to back them. There was also a lot of noise about Apple Maps and the poor rollout of that service, even though it turned out that people still bought iPhones as fast as Apple could make them.

My personal favorite was this fixation in some quarters that Apple had lost its innovation mojo because Tim Cook hadn't released a disruptive product after 14 months at the helm of Apple. I mean, seriously, that's just stupid and anyone saying that is merely showing their inability to research Apple's product timeline or exercise critical thinking skills.

More recently, we've gotten this new wave of pundits and critics who are prancing about yelling that for Apple to be successful, it must start doing what everyone else does. Cheap iPads, cheap iPhones, a broad product line...even open licensing has made a bit of a comeback.

Those of us who have followed Apple for a long time have witnessed this sort of thing forever. As Apple's stock rose, and rose, and then rose some more, it might have seemed like those days were gone, but—and here's my point—this same sort of ignorance about Apple has been prevalent all along.

Some Wall Street analysts were saying questionable things about Apple while the stock was climbing. In some cases, those stupid things took the form of "Buy" ratings, but it's a lot easier to ignore people who are right for the wrong reasons than it is when they're wrong for the wrong reasons.

The same is true for $AAPL investors. A lot of people bought shares of $AAPL on the way up not because they had a clue what Apple does or how it does it, but rather because everyone else was. This was true both at the retail level and the institutional level.

Indeed, at the institutional level, the pressure was even more intense. If you were a fund manager without $AAPL, you were nuts. $AAPL was such a powerhouse for so long—and remember that Apple Inc. is still the world's most valuable corporation—that owning shares was practically synonymous with window dressing.

That's kind of entertaining, too. Back in the early part of the last decade, some funds bought $AAPL during the quarter, but would then sell it off when it came time to report so that no one would see them owning the stock. This was the reverse of what may have happened in Q4 of 2012.

Lots of Factors

To be sure, there were many things that contributed to $AAPL's recent sell-off. Profit-taking, for instance was surely a part of it. There was a lot of money to be taken off the table, especially when $AAPL was flying high at $700 a share. Apple also missed Mac estimates, and it barely met iPhone estimates.

I also don't mean to imply that Apple is perfect and that the company should be trading at a gagillion dollars per share. There is a vast difference, however, between believing that Apple screwed up the Apple Maps rollout and selling the stock because Apple is on the skids as evidenced by Apple Maps.

As I Was Saying...

Back to the hedge funds and other institutions, the reason why they have so many shares of $AAPL to sell in the first place is because they loaded up on them on the way up. It's my opinion that there was a lot of bandwagon jumping in both directions. Ignorance fueled the rise just like it fueled the sell-off.

Most people don't get Apple. Wall Street is still largely steeped in the Microsoft era of open licensing and a focus on specs and rush-to-the-bottom pricing. Not understanding how and why Apple makes its profits, and why that model is sustainable, will absolutely have an effect on how you invest (or don't invest) in the company.

Apple raking in money hand over fist has had only a marginal effect in changing this. There are a handful of analysts who completely get it, understand it, and are tapped into Apple's supply chain in a way that gives them real insight on what to expect. There are another dozen or so—maybe a score—with a fairly good grasp of what's going on.

The rest are a bunch of bandwagon jumpers and leapers flailing about in ignorance, and there are some 54 analysts covering Apple right now. Think about that for a moment.

In the end, Apple is still the world's most valuable company, but the trajectory of the company's stock shows that the more things change, the more they stay the same.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.